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BEING STREET SMART

By Sy Harding

INVESTORS NEED FACTS FROM WALL STREET NOT FICTION!  July 4, 2008.

If ever investors needed honesty and help from Wall Street and tout TV, it's now, with another bear market apparently underway. But they're not getting it.

What they've been getting all the way down is assurances that it's always a good time to buy, certainly advisable to hold on, and incorrect information as to what constitutes defensive positions for those who would prefer to have more defensive positioning.

In an interview on financial TV last week a Wall Street type ridiculed investors who are now holding high levels of cash, saying "What good will cash at 2% interest do you?"

Well, pal, it sure as heck beats losing 20% or 30% doesn't it? Or losing 40% to 60% in the financials and housing stocks, and emerging markets that you and your Wall Street cohorts have been recommending all the way down.

In answer to tout TV's constantly repeated question of "What should investors be buying today?" Wall Street representatives invariably say, "In times like this, it's necessary to diversify into 'defensive stocks and sectors', including the big blue chips with international operations, and companies that have the wind at their backs because even in recessions people still have to eat, drink, and take their medicines. They won't go down as much as the overall market."

Huh? You should try to find companies and mutual funds that will lose less than the rest of the market? Like losing only 25% in a 35% bear market is good for your financial health?

Not a word about the opportunities to sell short or take positions in bear-type mutual funds or inverse etf's', which are making significant profits in the market decline.

But even Wall Street's assurances that such 'defensive' stocks will lose less than the overall market are not based on fact. Stocks most recommended as defensive stocks in 2000 as the 2000-2002 bear market got underway included the likes of Alcoa, Bristol Myers Squibb, CitiGroup, Coca-Cola, Disney, DuPont, Fannie Mae, General Electric, Home Depot, IBM, Merck, WalMart, and a few others. But they plunged an average of 59% to their bear market lows, worse than the Dow's decline of 'only' 38%, and the S&P 500 decline of 49%.

The other day an institutional money manager was making a strong case for buying a certain beaten down stock in a financial TV interview. Normally, the interviewer would have summed up by saying something like, "So, there you go folks, Jack thinks it's time to buy XXXXX." But this time there was a follow-up question, "So you think XXXXX has bottomed?" To which, after a moment's hesitation, the manager's answer was, "Well, it might not bottom for another six to nine months. But it may be a good time to begin building a position."

Begin building a position? An institutional manager with many billions to get invested might have to start 'building a position' six months before he expects a stock to bottom. Even that is a stretch. It would take many days, probably weeks, to get half a billion into a stock without affecting its price excessively. But a typical individual investor is more likely to be talking about investing $5,000 to $50,000 in any one position, and they can invest that amount all at once and in two minutes or less.

So wouldn't helpful advice be to wait until the stock seems to have bottomed, which may be six months out (if that is what his work is telling him). But no, the advice is to start buying today even though he thinks the stock will likely continue down for six months. Investors must keep buying, never selling.

A couple of weeks ago, a Wall Street type made the statement on financial TV that bear markets average a decline of 'only' 30%. It seemed to be an effort to assure investors that this bear market has only another 10% to go at worst, and probably less.

The media dutifully repeated that statistic here and there and over and over, apparently without checking it, until it is now accepted as fact.

But it is not.

Over the last 100 years there have been 24 bear markets, or one on average of every 4.1 years. Their average decline was 36%. The average decline of the ten largest bear markets was 48%. But even those declines were the declines of the conservative blue-chip Dow. So it's a safe bet that a typical investor's holdings lose considerably more in a bear market than the 30% Wall Street suggests.

But bear markets also have significant bear market rallies, which in the past have amounted to as much as 25%, before they reach their ultimate lows, well worth going after.

So in my opinion market-timing is still the way to go. We have had our subscribers on a sell signal since taking profits from the March/April rally (a bear market rally) in May, and positioned substantially for the downside in 'inverse' etf's. But we'll be watching for the next buy signal, which may not mark the end of the bear market, but could well result in a significant rally.

Meanwhile, Wall Street will have to change its bias if it is going to try to help investors. Constant advice to buy only works in bull markets.

Sy Harding is president of Asset Management Research Corp., DeLand, FL, publisher of www.streetsmartreport.com and the free daily blog www.syhardingblog.com. He also authored 1999's timely book Riding The Bear - How To Prosper In the Coming Bear Market.
He has a new book out, Beat the Market the Easy Way - Surprising Seasonal Strategies that Double the Market's Performance. Autographed copies are available at discount from his website for same day shipment.